Eight Questions About WaMu for Tom Leppert

An advance copy of a new book about the failure of Washington Mutual says the giant S&L sought to off-load subprime and other risky loans as the housing market was unraveling and later suffered a crippling bank run, quietly losing nearly $17 billion in deposits en route to becoming the biggest bank failure in American history.

The account is timely and instructive because Tom Leppert, who’s running for the GOP nomination for the U.S. Senate in Texas, served as a WaMu director and has touted his acumen as a businessman in the race. When we asked to interview the former Dallas mayor about the book and about his role at WaMu, spokesman Daniel Keylin said, “Tom would be more than happy to talk to you, but he’d obviously like to read the book first, which I understand hasn’t been released yet. Tough to talk about the contents of the book unless you’ve read it.”

Leppert joined the Washington Mutual board in 2005, before becoming mayor, and left it in 2009. He was a member of the company’s audit and corporate relations committees and also chaired the board’s governance committee. In debates and elsewhere Leppert has deflected blame for WaMu’s failure, pinning it mainly on a sharp, unexpected drop in housing prices and on federal regulators taking over the bank even though it was still solvent. Those regulators seized WaMu in 2008 and promptly sold its assets to JPMorgan Chase. Meantime, investors in the bank lost at least $30 billion.

According to the book by reporter Kirsten Grind titled The Lost Bank, due to be released in June, Seattle-based WaMu morphed from an old-fashioned, Main Street savings bank into an aggressive purveyor of high-risk mortgage loans including subprime loans and so-called Option ARM loans, for which many borrowers did not have to provide any documentation. (Option ARM loans often start with low teaser rates, but can quickly demand substantial payment increases with negative amortization.)

At the end of 2005, nearly half the loans in the bank’s $70 billion Option ARM portfolio were negatively amortizing, and an internal review found an “extensive level of fraud” in mortgages made at two of the bank’s offices. That same year, according to the book, the bank’s chief risk officer wrote to the executive committee that if the bank continued to make high-risk loans, the results for the company could be disastrous.

A year later, as the subprime housing market deteriorated, WaMu’s chief financial officer ordered the bank’s trading division to look at off-loading recent batches of subprime and Option ARM loans, Grind writes. As the “window” for such sales began closing, the bank’s CEO also encouraged executives to sell off as many Option ARMS as possible. By July of that year, Grind says, the bank’s bad loans had reached $5.5 billion, while its offloaded subprime securities had high default and loss rates — contributing to losses by the likes of investment banks, hedge funds and pension funds. Meanwhile, WaMu’s stock price plummeted 60 percent in 12 months.

During its final days in 2008, Grind writes, the bank suffered a “crippling” but largely unreported bank run, as depositors withdrew $16.7 billion. One official said WaMu did a “good job of keeping the bad news quiet.” In the fall, JPMorgan Chase snapped up what was left of the bank for $1.9 billion.

According to Grind, the bank’s board of directors during these years leveled “criticism infrequently … and board members rarely punished executives for wrongdoing. They sat through numerous audit reports and internal reviews detailing fraud in WaMu’s subprime mortgage division. They … approved [the CEO’s] higher-risk lending strategy.”

The directors were well-paid (Leppert’s 2007 compensation from WaMu amounted to $137,676, the Dallas Morning News reported) and were amply “warned over the years about the possibility of a real estate market crash,” Grind writes.

In the end, she says, a “review conducted by the Offices of Inspector General for the FDIC and the U.S. Treasury Department concluded that WaMu failed because of its high-risk loan strategy, a strategy made worse by the bank’s liberal mortgage underwriting and poor oversight of its operations.”

So, had he been willing to answer them, our questions for the former Dallas mayor would have gone something like this:

–How aware were you of the fraud problems noted by the internal review and, if you were aware of them, how did the board deal with the problems?

–What was your reaction to the CRO’s warning against the bank’s higher-risk loan strategy?

–Were you aware of, and did you approve of, the moves to off-load the subprime and Option ARM loans to other buyers?

–What was the board’s response on learning of the billions of dollars lost during the bank run?

–If you were not aware of these various warnings and developments, do you think a deliberate effort was made by the bank’s management to keep you and other board members in the dark?

–In general, what level of responsibility do you think board members bear for a company’s success or failure?

–Should committee chairmen have a higher level of responsibility than other directors?

Answers to these questions, I guess, will have to wait until the former mayor reads the book, presumably sometime after next Tuesday’s primary.

It would be interesting to know what value JPMorgan/Chase actually ended up with for their $1.9 billion. Follow that money and you will see another demonstration of how crooked the banking system is. You can rest assured it is worth a whole lot more and at the expense of the equity holders.

According to their own SEC documents, JPMC has gained approximately $47 billion in net assets for their $1.9 billion purchase.

Regarding questions for Mr. Leppert, you might want to ask him about the JPMC’s $3 million donation to one of his favorite projects, the Woodall Rodgers Deck Park. This $3 million donation occurred on February 2, 2010, mere months after Mr. Leppert’s October 7, 2009 departure from WaMu. I don’t know if those events were related, but it certainly is an interesting coincidence, given Mr. Leppert’s position as a member of WaMu’s board of directors.

@James Berg – A 2500% return in a year or two – I guess that is what happens when the predator becomes the prey and a government agency is the catalyst. My next question would concern where the agency employees that facilitated this transfer of wealth end up but that is probably too early to determine.

When this mysterious bank run was going on, JPM was busy preparing to get the banks for $1 as Jamie Dimon famously mentioned in Seattle after the seizure and sale were transacted. My question for Leppert would be.
How come the Board of Directors agreed to a Global Settlement Agreement that absolved all parties of any liability in the days leading up to WMB’s seizure and sale to JPM?
We know about Project West and we know that JPM executives lobbied the FDIC to seize and sale WMB to JPM as early as July 2008. It is alleged that JPM’s CEO Jamie Dimon was furious that WMI CEO Killinger turned down his all stock offer and decided that receivership way was the best way to get WMB. Project West was born and he eventually got what he wanted, not before he signed a confidentiality agreement in Sept 2008 that stated “he would not purchase the WMB franchise without WMI BOD approval and he and his staff would not disclose any info they attain from the due diligence to anyone. Well that worked out good for WMI. didn’t it? WMI could have sued JPM/FDIC/OTS for Billions but choose to give it all away.

WHY?

Did JPM FDIC have dirt on WMI executives, so therefore if they (Executives) wanted immunity, they had better settle. I know Mrs Grind’s book will not get into this part, no her book will be a preamble to why the bank was seized and sold for pennies on the dollar, not the alleged criminal conspiracy, but the Greed she thinks transpired at WMI headquarters and around the table in the room. I doubt she will focus on the Greed on the other side of the table in the form of non other than Jamie Dimon. We’ve all seen his hubris many times in the last 4 years, but lately it has shown as bright light to Wall Street.